Converting From traditional IRA to Roth & Medicare

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MakeMe$$$$
Posts: 772
Joined: Tue Aug 23, 2011 10:12 pm

Converting From traditional IRA to Roth & Medicare

Post by MakeMe$$$$ »

I didn't see this coming...

I converted from a traditional IRA to a Roth in 2018 and paid the appropriate taxes. No surprise there.

I started on Medicare in October and my premiums were on the lower range based on Joint earnings. No surprise. What I didn't realize that it was based on 2017 income.

Starting in January my medicare premiums were based on 2018 which included the amount I received from the traditional IRA conversion even though all that money went to the Roth. Along with the standard premium increase for 2020 my medicare premium went up an additional $57.80 per month because of the Income-Related Monthly Adjustment Amount, or IRMAA.

The good news is that next year things go back to normal. Also, withdrawals from a Roth IRA do NOT get included in IRMAA.

Keep in mind that IRMAA calculations are based on income from 2 years before the IRMAA is assessment. My 2020 medicare premiums is based on 2018 income which included the conversion.

So...

If you make a similar conversion just keep in mind that it will affect your Medicare premiums on the second year after you make that conversion.
Don
Rolled over to Fidelity 2/24/18.
Fantasy still playing with Daily Strategy 12767.

DogPyle71
Posts: 18
Joined: Sat Mar 05, 2016 11:10 am

Re: Converting From traditional IRA to Roth & Medicare

Post by DogPyle71 »

Good information- Thanks

JDD4J4J
Posts: 48
Joined: Thu Jan 05, 2012 2:21 pm

Re: Converting From traditional IRA to Roth & Medicare

Post by JDD4J4J »

Your premium didn't go up an additional $57.80. You were assessed an adjustment. The total premium for Medicare in 2020 is to be $578.40. The higher your income, the less the government subsidies your premium. The government paid 10% less of the premium for you, which left you responsible.

Traditional IRA is countable as taxable income when you take distribution, Roth IRA counts as income when you contribute. It can be advantageous to consider tax brackets and IRMAA brackets when potentially taking large amount of money as income. Depending on amounts, It may be beneficial to extend contributions/distributions over multiple tax years. Amended returns will cause proportional increase or decrease, as applicable.

If you do incure an income related monthly adjustment amount(IRMAA) a more recent tax year could potentially be considered if you have had a Life Changing Event(LCE) including work reduction or stoppage.
Last edited by JDD4J4J on Wed Jan 01, 2020 11:46 am, edited 2 times in total.

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MakeMe$$$$
Posts: 772
Joined: Tue Aug 23, 2011 10:12 pm

Re: Converting From traditional IRA to Roth & Medicare

Post by MakeMe$$$$ »

JDD4J4J wrote:The premium didn't increase an additional $57.80. ....

If you do incure an income related monthly adjustment amount(IRMAA) a more recent tax year could potentially be considered if you have had a Life Changing Event(LCE) including work reduction or stoppage.
Perhaps I wasn't clear...

The monthly Medicare premium based on my "normal" income went up from $135.50 to $144.60. However, because of IRMAA and based on my 2018 conversion they tacked on an additional $57.80.

Here is some of the full text from my recent notice regarding situations that might justify a successful appeal...

Each year to decide if you must pay IRMAAs, we use your Federal income tax information for the most recent tax year that is available. However, we do not use any information that is more than three years old. We ask the Internal Revenue Service (IRS) for your tax filing status, your adjusted gross income, and your tax-exempt interest income. We then add your adjusted gross income together with your tax-exempt interest income to get an amount that we call modified adjusted gross income (MAGI). We compare your MAGI with the income thresholds set by Medicare law.

MAGI may include one-time only income, such as capital gains, the sale of property, withdrawals from an Individual Retirement Account (IRA) or conversion from a traditional IRA to a Roth IRA. One-time income will affect your Medicare premium for only one year.

Some Special Situations That May Apply To You

If your tax filing status was married, filing separately, and you lived apart from your spouse throughout the tax year we used, please call us about your living arrangement. It could lower your IRMAAs. We will set up an appointment to discuss that information. You will need to bring a copy of the most recent income tax return you filed with IRS to the appointment.

If Your Income Has Gone Down

In some situations, we can make a new decision about your IRMAAs. Contact us to request a new decision if your MAGI has gone down at least one range in the table above or has gone below the lowest amounts in the table since the 2018 tax year, AND the decrease in MAGI was caused by any of the following life-changing events:

• You married;
• You divorced, or your marriage was annulled;
• You became a widow or widower;
• You or your spouse stopped working or reduced work hours;
• You or your spouse lost income from income-producing property due to a
disaster or other event beyond your control;
• You or your spouse experienced a scheduled cessation, termination, or
reorganization of an employer's pension plan; or
• You or your spouse received a settlement from an employer or former employer
because of the employer's closure, bankruptcy, or reorganization.

We will use the new lower MAGI to see if we can make a new decision about your IRMAAs. We cannot make a new decision if your income has changed for a reason other than those listed above, such as receiving one-time income from capital gains.

You will need to submit proof of the event listed above that caused your income to go down (such as a death certificate, a letter from your pension fund administrator, or a letter from your employer about your retirement). If you filed an amended or corrected tax return for the year you want changed, you will also need to submit a copy of the tax return with proof the IRS has received it.

If your MAGI has gone down at any time during January through September, you will need to tell us before the end of that year so we can correct your IRMAAs in that year. However, if the event that makes your MAGI go down did not occur until October 1 or later in the year, we can correct your IRMAAs for that year if you tell us before the end of March of the following year.
Don
Rolled over to Fidelity 2/24/18.
Fantasy still playing with Daily Strategy 12767.

JDD4J4J
Posts: 48
Joined: Thu Jan 05, 2012 2:21 pm

Re: Converting From traditional IRA to Roth & Medicare

Post by JDD4J4J »

I apologize, perhaps I was not clear.

They did not tack on an additional $57.80. Based on increased overall demand for medical services, not your "normal" income, the monthly Medicare Premium total is to be $578.40/MO in 2020, a $36.40 increase from $542 in 2019. Which an individual standardly pays 25%, which will be $144.60 in 2020, a $9.10 increase from $135.50 in 2019. However the administration determined in the early 2000s that if an individual has a higher income, the government would pay less and the individual would pay more.

Based on your income for 2018, you would pay 35% of the premium, instead of 25%, an adjustment of 10%, $57.80. It's an income related monthly adjustment amount or IRMAA. As the notice mentions, if you have had a life changing event, a more recent tax year can be considered.

That is not however appealing the decision. You can appeal if you feel that the amount was calculated incorrectly. However, using a life changing event(LCE) is that you agree with the calculation, though wish to request that they use a more recent tax year for the calculation. This can be accomplished on a form SSA-44, LCE for IRMAA. An appeal, if applicable, would be completed with a form SSA-561, Request for Reconsideration.

I hope this clears everything up for you.

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bloobs
Posts: 1067
Joined: Tue May 21, 2019 8:00 pm

Re: Converting From traditional IRA to Roth & Medicare

Post by bloobs »

MakeMe$$$$ wrote:I didn't see this coming...

I converted from a traditional IRA to a Roth in 2018 and paid the appropriate taxes. No surprise there.

I started on Medicare in October and my premiums were on the lower range based on Joint earnings. No surprise. What I didn't realize that it was based on 2017 income.

Starting in January my medicare premiums were based on 2018 which included the amount I received from the traditional IRA conversion even though all that money went to the Roth. Along with the standard premium increase for 2020 my medicare premium went up an additional $57.80 per month because of the Income-Related Monthly Adjustment Amount, or IRMAA.

The good news is that next year things go back to normal. Also, withdrawals from a Roth IRA do NOT get included in IRMAA.

Keep in mind that IRMAA calculations are based on income from 2 years before the IRMAA is assessment. My 2020 medicare premiums is based on 2018 income which included the conversion.

So...

If you make a similar conversion just keep in mind that it will affect your Medicare premiums on the second year after you make that conversion.
blindsided! i am far from retirement and along the same vein, i would like to know if we could circumvent medicare by keeping our regular fed insurance into retirement instead?
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Mad Maxx
Posts: 46
Joined: Mon Jan 09, 2017 1:57 pm

Re: Converting From traditional IRA to Roth & Medicare

Post by Mad Maxx »

At my latest FERS seminar we were told if we have Aetna then we don't need to add Medicare. I didn't believe it until a family member went in for major surgery and lengthy rehab (80 years old and a CSRS) and he chose Aetna just because of that. No bills. Probably something to look into..

JDD4J4J
Posts: 48
Joined: Thu Jan 05, 2012 2:21 pm

Re: Converting From traditional IRA to Roth & Medicare

Post by JDD4J4J »

There are 4 main parts of Medicare:

Part A is Hospital insurance and if a person, or spouse if applicable, has worked hard and paid into the Social Security/Medicare system, all $451/MO is paid for by Medicare tax, by the Federal government.

Part B is Medical insurance; covering doctors visits, out-patient surgeries, and tests. It is compatible with most Group healthcare plans, as primary or secondary, depending on employment status. Again majority, however this time not all, of the premium is paid for by Medicare tax, by the Federal government. The individual generally pays 25%.

These two parts are the original Medicare facilitated by the government. Covering 80% of your hospital and medical cost. The red, white, and blue card. The other 2 main parts are supplements provided by third party insurance, generally for those that do not have access to Group Healthcare Plan through current active employment or retirement from themselves or a loved one.

Part C is Advantage Plan to insure for the 20% Part A & B does not cover through co-pays, co-insurances, deductibles, and premiums.

Part D is prescription drug coverage.

Federal Employees are generally able to take their group healthcare plans into retirement. If so, they would generally take Part A at 65, Part B at retirement, which would then pair with their FEHB, and generally have no need for Part C and Part D. However there are exceptions where it can be advantageous, as applicable.

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evilanne
Posts: 1886
Joined: Thu May 14, 2015 6:52 pm

Re: Converting From traditional IRA to Roth & Medicare

Post by evilanne »

bloobs wrote:blindsided! i am far from retirement and along the same vein, i would like to know if we could circumvent medicare by keeping our regular fed insurance into retirement instead?
You can keep you federal insurance in retirement with or without medicare if you have it for a certain period of time prior to retirement.

I know TriCare requires you to sign up for Part B at 65. I don't think FEHB plans do but they recommend you to sign up for Medicare part A at age 65 (no cost). If you do not sign up for Part B when eligible & not employed, there is an 10% penalty per year when you do sign up.

Nothing I can find say you have to enroll in Part B as a federal retiree but if you do most FEHB plans waive the deductibles and coinsurance for most things but maximum out of pocket expense does not change. Depending on your health/personal situation, its a cost/benefit analysis.

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evilanne
Posts: 1886
Joined: Thu May 14, 2015 6:52 pm

Re: Converting From traditional IRA to Roth & Medicare

Post by evilanne »

MakeMe$$$$,

I understand what you are saying and need to watch income/conversions prior to age 65. To avoid paying higher medicare rate currently the MAGI threshold is <$85,000 for Individuals or <$170,000 for Married couples. MAGI is your AGI plus tax-exempt interest income. https://www.ssa.gov/pubs/EN-05-10536.pdf

JDD4J4J,

My question is once you get Medicare, do they continue to monitor your income each year? Once MakeMe$$$$ gets it back down next year, will they automatically increase his medicare payments again if he does another conversion that puts him over the threshold?

Second question for JDD, can he use his 2019 income tax return that he files before April 15th, 2020 to get an adjustment to his current rate? Does he actually have to do something to ensure that his rate goes back down next year?

JDD4J4J
Posts: 48
Joined: Thu Jan 05, 2012 2:21 pm

Re: Converting From traditional IRA to Roth & Medicare

Post by JDD4J4J »

The IRMAA will be considered for a Medicare beneficiary as long as they are entitled to Medicare. SSA will automatically consider the next following year. Standardly, the year is considered 2 years back. For example A person has income in 2018, they file their taxes by April 15th 2019, SSA gets the information by Oct and uses the information for 2020. 2018 affects 2020, 2019 affects 2021, 2020 affects 2022 and so on. Though, a person can only have them consider a more recent tax year, such as 2019 or 2020, instead of 2018 for 2020 if they have had a life changing event(LCE), Now luckily because they are Social Security, they do consider work stoppage and work reduction life changing events. Under these circumstances a person would submit form SS-44, LCE for IRMAA, to have them consider the request. Otherwise, if a person doesn't qualify for LCE, it will automatically go on to considering the next year as the year changes.

wingchaser
Posts: 122
Joined: Thu Jan 22, 2009 8:39 am

Re: Converting From traditional IRA to Roth & Medicare

Post by wingchaser »

MakeMe$$$$ wrote:I didn't see this coming...

I converted from a traditional IRA to a Roth in 2018 and paid the appropriate taxes. No surprise there.
My approach has been to (periodically) move my TSP over to a ROLLOVER IRA ACCOUNT with Fidelity & not to incur any tax penalties until the time I begin withdrawals in my retirement years. The ROTH IRA is something I learned about @ a very young age. Somewhere I heard that this is the only tax vehicle that is NOT TAXED, not matter how exponentially it is grown. That means that over time (20 years) with over 1,000% returns, it will produce a supplementary tax-free income stream.

Best of Luck (everyone) in all you choose to endeavor!!!
“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t... pays it.” ~ Albert Einstein

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